Have you ever heard the old adage, “just because you can, doesn’t mean you should?” Well, it’s especially appropriate when it comes to personal finance. Just because the bank will lend you a certain amount does not mean you should take it. Live beneath your means, borrow beneath your limit.
Car and Mortgage lenders will tell you what you can borrow based on a narrow view of your income and very basic expenses. The reality is that you have A LOT more expenses and therefore even though you can get a certain loan, you really can’t handle it comfortably on a monthly basis.
You have to think about the down payment, but you also have to think about the monthly payment. Both have to be within your means. You may have enough saved up for a down payment on a bigger house, but you really can’t handle the monthly payment.
There are a million car, mortgage and student loan calculators online (not all of them are great, but some of them are). Make sure you know the exact payment you will have to make on your new mortgage, car or student loans and then run your cash flow. Here’s an example evaluating if you SHOULD or SHOULD NOT buy that dream house:
| Should I or Shouldn’t I | Should | Should NOT |
|---|---|---|
| Total Take Home Household Income | $7,685 | $6,990 |
| New Mortgage for DREAM HOUSE | $2,230 | $2,230 |
| Expenses (car payments, childcare, groceries, gym, haircuts, utilities, etc.) | $2,855 | $2,855 |
| Full Discretionary (fam. of 4 $1-2k/month of eating out, clothes, entertainment, etc.) | $1500 | $1500 |
| Remaining | $1100 | $405 |
| Saving for vacations and annual expenses | $400 | $400 |
| Cushion | $700 | $5 |
If you do not have at least $500/month left at the bottom of your Cash Flow (Cushion), you should not do the deal. You will feel a lot more stress and if anything comes up like your child needs a tutor or you have some extra medical needs, you don’t have the money.
Before you embark on a large expense, make sure you can be personally comfortable with both the down payment AND the monthly payment. Prove it to yourself with a quick table like this and know you’re okay. Live beneath your means, borrow beneath your limit!